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Ask the Energy Expert: Energy improvements can increase net operating income & property value

Q. My investment broker has suggested making energy efficiency upgrades as a way to increase my property value. Can you explain the financial benefits?

A. A growing trend in the industry is to increase property value by reducing operating expenses. Traditionally, property managers have increased their rents to keep up with rising costs and to improve property value. Today, many property managers are using energy efficiency improvements as a way to increase property value and differentiate themselves from the competition.*

Add up the savings
To understand the value of energy efficiency, let’s look at a hypothetical example: Evergreen Properties manages a 20-unit property that generates $98,100 in annual net operating income. The building is worth $1,509,231 assuming a cap rate is 6.5 percent. Evergreen makes the following upgrades, which are typically very cost-effective:

• Common-area lighting retrofits in hallways, stairways, entry way, exterior
• Laundry room upgrade (replaced washing machines with high-efficiency models)

As seen in Table 1, these improvements yield $3,000 in savings on the property’s electric, water and sewer bills. With a 6.5 percent capitalization rate, these savings translate into $46,154 in added property value.

Table 1. Energy Savings Investment
Before After

# Units 20 20
Scheduled Gross Rents $174,000 $174,000
Gen. Operating Expenses ($42,700) ($42,700)
Utilities ($9,500) ($6,500)
Vacancies 5% ($8,700) ($8,700)
Property Taxes ($15,000) ($15,000)
Net Operating Income $98,100 $101,100
Cap. Rate 6.5% 6.5%
Market Value $1,509,231 $1,555,385
After the initial investment, Evergreen immediately benefits from the monthly utility savings and a short payback period. The investment itself turns out to be just a fraction of the increased property value. The rest can be pure profit.*

Start with common-area lighting improvements
These deliver a quick return on investment because property managers and owners pay for the electricity. Focus on fixtures that are on for long periods of time. Upgrades that typically are the most cost-effective include: ENERGY STAR® compact fluorescent lights, T8 fluorescents with electronic ballasts, occupancy sensors to turn off lights in areas where they often are left on unnecessarily, high-efficiency LED exit signs, timers and/or photosensors on outside lights and replacing aging outdoor lighting with more efficient sources.
Common area lighting improvements are easy to implement and often payback in two years or less. The lighting quality typically improves, and you can expect the new lamps to last longer, reducing your maintenance costs.

Consider early retirement of clothes washers
If your clothes washers are five years or older, consider replacing them with ENERGY STAR-qualified washing machines that have a 2.0 or more energy factor (EF) and a 6.5 or less water factor (WF). These washers deliver significant utility savings. In fact, because of the water and sewer savings, you should seriously consider early retirement of washers in tenant units. You’ll save money and your tenants will save on their energy bills as well.

Boost your marketing success
Improving the efficiency of your building gives you a competitive edge with today’s renters, who are more educated, more discerning and more demanding than ever. Your building becomes much more attractive to renters looking for a smaller environmental footprint.

Learn more at “Smart Investments in Energy Efficiency” workshop
Multifamily property managers serving PGE customers can learn more at a free workshop held November 11, 2008, 7:30 a.m.-12:00 p.m., at the World Trade Center in Portland. Property management professionals and energy industry experts will discuss how to make wise investments to save energy, enhance tenant comfort and improve the bottom line. You’ll also learn how to take advantage of cash incentives from the Energy Trust of Oregon as well as the 35-percent Business Energy Tax Credit offered by the Oregon Department of Energy. To register, send an e-mail to PGE.Seminars@pgn.com or call 503-464-8020.

Get help from PGE
Learn more energy-saving ideas at PortlandGeneral.com/SaveEnergy. Or contact our Business Services team at 503-228-6322 or Business.Services@pgn.com.

If you have questions you’d like to have answered in future columns, please e-mail Roch.Naleway@pgn.com.

*Individual project costs, utility savings and investment results will vary.

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